$200 billion tax cut with MPC 0.8 increases AD by up to:

This option represents a miscalculation of the impact of the tax cut. It does not account for the multiplier effect of the MPC, which amplifies the initial tax cut's effect on aggregate demand. An increase in AD of only $160 billion would suggest an MPC significantly lower than 0.8, which is not the case here.

Choosing $200 billion implies that the entire tax cut translates directly into an increase in AD without considering the multiplier effect. This ignores the behavioral response of consumers to utilize the tax cut, as the MPC indicates a significant portion of the tax cut will be spent, leading to a larger overall impact on AD.

This figure exceeds the calculated potential increase in AD. While it reflects an overestimation of the multiplier effect, it does not align with the fundamental relationship between the tax cut and the MPC of 0.8. The calculation shows that the maximum increase in AD due to the tax cut is $800 billion, not $1,000 billion.